As the U.S. economy rounds the midyear turn, most economists believe that growth will resume as early as the current quarter. They are trying not to let you see that they are saying this with their fingers crossed.
Several months ago, it looked as though the economy was in the process of bottoming out. A number of statistics had begun to point up, not the least of which was the stock market, considered by many to be a venerable leading indicator.
From the middle of March until the middle of June, stocks went on a tear, rising more than 30% -- the biggest jump in such a short period of time since the 1930s.
It is an open question why stocks rose as much as they did -- especially since they have gone nowhere over the past few weeks. Some believe that stocks fell too far, while others think the market was anticipating a turn in corporate profits as early as the third quarter.
Whatever the case, it should be pointed out that even with this big run-up, stocks, as measured by the Dow Jones Industrial Average, are still below their levels at the turn of this year -- much less a year ago, when the Dow was just below 12,000, and 21 months ago, when the Dow peaked at 14,165.
This has a direct bearing on the economic outlook and whether the market's expectations will come to fruition. Stocks at today's levels represent a tremendous loss in investors' net worth. This alone has been enough to put the kibosh on consumer spending, which represents 70% of the gross domestic product.
Another depressant holding back the urge to splurge is the drop in residential real-estate values. For many, a home is their biggest asset, and lower prices alone are enough to cause people to pull in their horns. Add in their inability to pull money out in the form of a home-equity loan, and the prospects for spending gains become even dimmer.
To add insult to injury, the price of oil and gasoline has been on the rise since the beginning of this year. Although well below levels a year ago, when prices peaked at more than $4.00 a gallon nationwide, gasoline still costs about 60% more today than it did six months ago, making it difficult for many households to buy other goods and services.
Spending is also being constrained by a decision on the part of many households to rebuild their depleted bank accounts. The savings rate has gone from zero to a 15-year high of nearly 6% -- and they are earning very little on their savings, due to today's record low interest rates.
On top of this, falling employment and rising unemployment are also exerting a drag on consumer spending. And if the past two recoveries are any guide, it could take a year or more after the economy turns before employers will resume hiring.
As for Washington's stimulus package, very little has hit the economy so far -- as I first pointed out in my column of May 26 and reiterated last week. Indeed, when you factor in cutbacks at the state and local level, you could almost say that fiscal policy has actually tightened over the past year.
Even the turnaround in business productivity is nothing to cheer about. What good is it to be more efficient if you don't have many customers coming through the door
